Explain the factors influencing short run and long run aggregate supply
Factors affecting the short run aggregate supply includes factor costs, temporary supply shocks, government policies with short-term effects and expectation of price level.
Firstly, at the same price level, a rise in factor cost (such as an increase in oil prices) would make production less profitable. As a result, firms would reduce their output. The short run aggregate supply curve shifts leftwards. Secondly, temporary unfavorable supply shocks are short-term events that adversely affect the aggregate supply. Strikes, bad weather and natural disasters are examples of temporary unfavorable supply shocks. These factors shift the short run aggregate supply curve leftwards for a short period of time only. Thirdly, some government policies have temporary effects on the aggregate output supplied and affect the short run aggregate supply curve. For example, a rise in sales tax would raise production costs. At the same price level, firms have to cut their outputs. Therefore, the short run aggregate supply curve shifts leftwards. Lastly, if the price level is expected to rise, firms would retain their present supply for future sale. The short run aggregate supply curve shifts leftwards. Conversely, if the price level is expected to fall, firms will speed up production and increase their supplies in hopes of earning more by selling their goods at the current higher prices. This shifts the short run aggregate supply curve to the right.
Factors affecting long run aggregate supply include quantity of factors, quality of factors, technology level and production efficiency and government policies with long term effects.
Firstly, when quantity of factors increases, the full employment real national income rises as more resources can be used in production. The quantity of available factors increases when more deposits of natural resources can be accessed and extracted, the labour force grows net investment in machinery and equipment increases and more entrepreneurs are trained. Secondly, full employment real national income increase when factor quality improves, this is because same amount of factors can produce more. Factor quality improves when soil is fertilized or irrigated; workers are better educated and trained; more advanced machines are installed and professional entrepreneurial skills are cultivated. Thirdly, advancement in technology level and production efficiency shifts the LRAS rightwards. Innovation, technological advancement, growth of international trade and globalization are factors promoting productivity and efficiency. Higher productivity and efficiency imply more output can be produced with the same amount of resources. Lastly, some government policies ban bring a long term increase in employed factors and available factors, an improvement in factor quality and an increase in productivity, These long term government policies can increase full employment output level. Examples of theses policies include admission of quality migrants, providing education subsidies, offering worker retaining services and provision of tax relief to encourage investment etc.
